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India is termed as an Emerging Economy. It has provided numerous opportunities to young entrepreneurs trying to make a name for them in the business world.

Businesses need capital! They need a lot of funding from the inception stage to the first working model being released into the market. There are other expenses like wages, raw materials, utility bills, transport and other incidentals to be taken care of. Businessmen primarily depend on loans to finance their business. There are two types of business loans

Secured loans for business are those which are given against a personal guarantee or some kind of collateral pledged by the borrower. Secured loans are usually disbursed as Term Loans, Equipment Loans, Vehicle Loans or Loans against Property.

Unsecured loans, on the other hand, are issued on the credibility of the business itself, instead of collateral or guarantee. These loans are usually taken for a short time period of up to 12 months. These are mostly non-fund based credit facilities like OD, Letter of Credit, Bank guarantees, and so on.

Features of Unsecured Business Loans

  • As the name suggests, this loan type does not require any collateral
  • Loan amounts of Rs. 50,000 to Rs.1 crore can be availed without any collateral
  • Loan sanction is solely on the bank’s discrimination and guidelines
  • Your creditworthiness and repayment history play an important role
  • Repayment tenures range from 12 months to 60 months
  • Some banks offer Overdraft facility for unsecured business loans
  • The business should be at least 3 years old and should have been making profit for 2 years consecutively

What are the benefits of Unsecured Business Loans?

Nil Collateral – Securing a large capital amount for your business without any collateral enables you to take care of various immediate business needs

Large capital at affordable rates – Unsecured business loans can offer loans of up to Rs.1 crore without collateral. This is very affordable.

Flexible repayment – They offer the flexibility of choosing a comfortable repayment tenure based on your needs

Minimal documentation – Without any collateral, the documentation process for these loans are less of a hassle compared to secured loans.

Quick approval and faster disbursal – With minimal documentation, these loans are processed quicker and the amount is deposited in your bank account at the earliest.

Easily accessible for established businesses – Well established businesses and businesses with good relationships with the bank have easy access to these loans.

Who all can apply for Unsecured Business Loans?

  • Sole Proprietorship
  • Partnerships
  • Private and Public Limited Companies

What is the average rate of interest of Unsecured Business Loans?

The average rate of interest on Unsecured Business Loans currently stands at 8% - 22%. It greatly depends on the business plan and the needs of the business.

What are the eligibility criteria to apply for Unsecured Business Loans?

  • It is available for businesses based in India
  • Minimum age of the applicant should be 18 years and maximum 65 years
  • The business should have been in operation for at least 3 years and should have made profit for 2 consecutive years
  • Employed/Salaried individuals should show proof of employment continuity for the number of years requested by the bank
  • The applicant must have a strong credit score

Documents required to apply for an Unsecured Business Loan

  • PAN card of a company or an individual
  • Identity proof like Aadhaar Card, Voters Identity Card, Passport and Driving License
  • Address proof like Aadhaar Card, Voters Identity Card, Passport and Driving License
  • Bank Account details along with Bank Statements for the last 6 months
  • The Balance Sheet, the P&L i.e. the Profit and Loss statement for past 2 years along with latest ITR filings which is duly audited by a certified Chartered Accountant
  • A proof of continued business operations like Income Tax Return of last 3 years, a valid Trade License, Sales Tax Certificate, Shops and Establishments Act Certification, etc.
  • Other obligatory documents like the declaration of sole proprietary, a certified copy of the deed of partnership, a certified true copy of the Articles of Association and the Memorandum of Association as well as the Board Resolution in original

Factors affecting the Eligibility for an Unsecured Business Loan

As stated earlier, Unsecured Business loans are given solely on the creditworthiness of the applicant. You need to convince the bank/lender about the profitability of your business to get an unsecured business loan. The following factors are taken into consideration while processing your loan application.

Credit score: It is important for the banks to be assured about the repayment capability of the borrower. A high credit score assures that to the bank. The bank will check the company’s credit score to determine credibility. They look into the repayment history on other loans and liabilities you have. Good credit history will help in getting the loan easily with better terms and interest rates. The credit score for both individual applicants is also taken into consideration in the case of Sole Proprietorship.

Business stability: The financial stability of the business is important to sanction the loan. Banks will look into the sales and profit aspects of the business. This can be inferred from your business history and the tenure of your company. Usually, banks prefer companies that have a tenure of at least 3 years to sanction the loan. Older the business, greater the chance of getting a business loan with favourable interest rate and other conditions.

Business Profitability & Continuity: Another important criterion is that your business should be making considerable profit. Banks wouldn’t want to lend money to a business that is not doing very well. Bank might ask you for the profit & loss statement of the past 2 years. Your organization’s profitability and revenue play an important role in determining if a company can be given a loan or not.

Current relationship with the Bank: Your current standing with the bank is also important. The bank will look into all your relationships with the bank. The cash flow and payments on your account. It will also see your repayment history on any existing loans you have with the bank.

Drawbacks of Unsecured Business Loans

  • Unsecured Loans usually come with a higher interest rate compared to secured loans
  • It could have an adverse effect on your credit score if you default on the payments
  • Vigorous credit checks by the lender on the borrower’s financial status
  • Sometimes, Directors and Company Owners will have to sign personal guarantees to meet the high credit rate expectation

All in all, Unsecured Business loans are highly advantageous for companies that have less assets or do not wish to provide a form of collateral. It is also helpful for new entities that cannot produce substantial collateral. With high capital availability, businesses are able to take care of immediate business needs with these unsecured business loans.

Unsecured Business Loans FAQs

1. How much money can I borrow in an Unsecured Business loan?

Unsecured business loans are given as per business needs. Applicants can avail Unsecured Business loans from Rs. 50,000 up to Rs.1 crore.

2. Who all can apply for Unsecured Business Loans?

Sole Proprietorship, Partnerships, Private and Public Limited Companies

3. What is the average rate of interest of Unsecured Business Loans?

The average rate of interest on Unsecured Business Loans currently stands at 8% - 22%. It greatly depends on the business plan and the needs of the business.

4. What is the minimum and maximum repayment period of an unsecured business loan?

The repayment period of unsecured business loans ranges between 12 months to 60 months.

5. Can Start-ups get Unsecured Business loans?

Unsecured business loans are usually given to well-established business entities. The business should have been in operation for at least 3 years and should have made profit for 2 consecutive years. Hence, Start-ups might not be able to get Unsecured Business Loans.

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